Can portfolios be constructed entirely of ETFs?

Author: Edward Allen
IFAonline | 25 Jul 2013 | 08:00

Categories: Equities| Fixed Income| ETFs

Topics: ETF| Thurleigh

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Following its rapid growth over the last decade, Edward Allen, partner at Thurleigh Investment Managers, examines the current state of the ETF market.

As one of the fastest developing investment industries of the past decade, exchange traded funds (ETFs) are rarely far from the headlines. In the past few years, we have seen impassioned debates on physical versus swap-based ETFs, the merits of active ETFs, dividend-enhanced ETFs, commodity ETFs, bond ETFs, alternative ETFs…

So, what’s new?

Recent figures from Deutsche Bank show some interesting trends. The first of these is that, while the assets managed by ETF providers continue to expand apace, the rate of increase in the number of ETFs (see figure one, below) has come back significantly, even after accounting for the fact that we are only part way through 2013. Why is this?

It seems there is a certain amount of consolidation going on (ETFs that fail to attract assets are being closed down) and it may be that we are starting to see signs of market saturation, at least of the product range, if not assets under management.

The other chart that caught my eye recently concerns the commodity market (see figure two). While commodity exchange traded products (ETPs) hold a far smaller pool of assets than mainstream ETFs, the decline in 2013 is shocking, with a €10bn outflow from precious metals alone.

Putting this figure into context, this withdrawal is greater than the total amount added to commodity ETPs in either 2012 or 2011.

That gold has had a tough year is no news to any of us; however, I think this is a timely indicator of the scale of withdrawal of assets from this asset class.

To investors like us, who have long been fearful of gold precisely because of the rapid increase in the size of gold ETPs, this is somewhat of a vindication. We will be interested to see how the present situation develops over the coming months.

Returning to mainstream ETFs, the fantastic advantage to advisers today is that the variety and sophistication of the European ETF market is as good as it has ever been.

As shown by iShares (figure three), advisers have the benefit of a full range of asset classes, from equities through to bonds, alternatives, commodities and cash. This means that portfolios can be constructed entirely using ETFs if desired. ETFs can also be used within a “core-satellite” strategy (as either the core or the satellite) or to slot a specific asset class into a portfolio.

Taking these options in turn:

100% ETF portfolio

In today’s market, it is perfectly possible to create a low cost portfolio comprised entirely of ETFs. Within an asset allocation strategy, individual ETFs can be chosen to access each desired asset class.

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